IRDA legally wrong, SBI Life morally wrong: Insurance experts

The insurance regulator's direction to SBI Life Insurance Company to refund excess commission of Rs.275.29 crore to policy holders has been questioned by industry experts.

"The IRDA (Insurance Regulatory and Development Authority) is legally wrong in issuing such a direction as it had approved the products in question. Further what SBI Life has done is legally right. Insurers do receive premium in advance and adjust it as and when it becomes due," R. Ramakrishnan, a member of Malhotra Committee on insurance reforms and a consulting actuary, told IANS.

"The action of SBI Life is morally wrong while that of IRDA is legally wrong," he remarked.

"It is also doubtful whether IRDA has the power to issue such a direction under the Section 34 (1) (b) of the Insurance Act," a senior lawyer and an expert in insurance laws told IANS.

According to the direction issued by IRDA Chairman T.S. Vijayan, SBI Life's policy in question has two premium payment options - single premium and two year premium paying plan.

In the case of single premium policy, the premium for the entire policy period is collected upfront and it is lower. The commission paid on that cannot be more than two percent as per the Insurance Act.

On the other hand, the premium under the two-year premium paying plan is slightly higher and the commission rate is 40 percent on the first year premium and 7.5 percent on the second year premium.

According to IRDA, SBI Life's corporate agents mostly State Bank of India and its associate banks concealed to the policy holders the availability of single premium option.

The corporate agents sold the two-year premium payment plans. However, they collected the premium for two years in advance. This is done mainly to pocket 40 percent commission on the first year premium and 7.5 percent on the second year premium.

The IRDA found out this practice during its onsite inspection of SBI Life's books.

"At the time of approving the product itself the IRDA should have raised simple questions to SBI Life like why there should be two-year premium payment option when there is single premium policy and why the company should pay 40 percent commission when it is a group insurance scheme," Ramakrishnan said.

He said normally such policies have a premium payment term of two-thirds of the loan repayment period and it is wrong to have allowed two-year premium payment term policy at the first place itself.

A former executive director at Life Insurance Corporation of India (LIC), Ramakrishnan said: "LIC used to pay only 7.5 percent commission on first year premium on its group policies."

Be that as it may, the talk of the industry Wednesday is the IRDA's direction to SBI Life to refund Rs.275.29 crore and debit it to its shareholder's account.

"It is certainly unethical on the part of SBI Life to have indulged in such a practice. The company is promoted by nationalised bank SBI (State Bank of India) technically owned by people but acted against their interest," said an industry expert not wanting to be named.

The company is a 74:26 joint venture between SBI and BNP Paribas Cardif of France.

Another industry expert told IANS: "IRDA should also look at other options of protecting the policy holders interests-like refund of premium. Further it is strange that IRDA has not penalised the corporate agents licensed by it."

Repeated attempts by IANS to reach the officials of SBI Life and IRDA chairman Vijayan for their comments did not succeed.